Markets WILL achieve EFFICIENCY, but they won’t achieve EQUITY! What else won’t they do?
1. ID and define. 2. Cite illustrative examples. 3. Use specialized vocabulary.
Occurs when ◦ the outcome of the FREE MARKET ◦ the SOCIALLY OPTIMAL outcome DIFFER
1. Externalities (+ and -) 2. Public Goods 3. Adverse Selection 4. Moral Hazard Click here to access tutorial #31.here
MORAL HAZARD: if somebody “cleans up” the “mess” you make when you take too much risk, then (because you get rewarded instead of punished) you may choose too take more risk and make more and bigger messes in the future! Click HERE to access video.HERE
People sometimes make PRIVATE decisions that have unintended impacts on others. These are called EXTERNAL EFFECTS or EXTERNALITIES. They occur when one person or group does something that affects other people without the usual COSTS or PAYMENTS. A 3 rd party NOT involved in the transaction ◦ Pays a COST (NEGATIVE EXTERNALITY) without enjoying a benefit ◦ Enjoys a BENEFIT (POSITIVE EXTERNALITY) without paying a cost.
1. NEGATIVE EXTERNALITIES: 3 rd party is hurt 2. POSITIVE EXTERNALITIES: 3 rd party benefits Click HERE to access Tutorial #32.HERE
1. PRIVATE cost + EXTERNAL cost SOCIAL cost 2. GOVERNMENT’S ROLE: INTERNALIZE COSTS ◦ Gov’t “hands on” the economy! ◦ Regulation ◦ Taxes ◦ Fines ◦ Fees
1. PRIVATE benefit + EXTERNAL benefit SOCIAL benefit 2.GOVERNMENT’S ROLE: INTERNALIZE BENEFITS ◦ Tax credits ◦ Tax deductions ◦ Subsidies ◦ Grants ◦ Low interest loans
NEGATIVE EXTERNALITIESPOSITIVE EXTERNALITIES TOOOOOOO much Produced at a level higher than that which is SOCIALLY OPTIMAL Because the “baddies” creating them don’t have to pay a price TOOOOOOOOO little Produced at a level lower than that which is SOCIALLY OPTIMAL Because people who don’t pay for them use them
1. PRIVATE GOODS ◦ a. excludable ◦ b. rivalrous 2. PUBLIC GOODS ◦ a. NONexcludable ◦ b. NONrivalrous ...The “FREE RIDER” Problem ◦ 1.) FIREWORKS ◦ 2.) LIGHTHOUSES Click HERE to access Tutorial #33.HERE